UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
| [X] | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the fiscal year ended December 31, 2015 |
| [ ] | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the transition period from to |
Commission file number: 000-29381
ACOLOGY, INC.
(Exact name of registrant as specified in its charter)
| Florida | 65-0207200 | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employee Identification No.) | |
| 1620 Commerce St., Corona, CA | 92880 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (844) 226-5649
Securities Registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Name of each exchange on which registered | |
| None | None |
Securities Registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b2 of the Exchange Act.
| Large accelerated filer | [ ] | Accelerated filer | [ ] | |||
| Non-accelerated filer | [ ] | Smaller reporting company | [X] |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes[ ] No [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately $2,604,000 on the last business day of Registrant’s most recently completed second quarter, based on the average bid and asked prices.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
The number of shares outstanding of the registrant’s common stock as of April 14, 2016, was 5,164,134,794.
(DOCUMENTS INCORPORATED BY REFERENCE)
None
ACOLOGY, INC.
FORM 10-K
| Page | ||||
| PART I | ||||
| ITEM 1. BUSINESS | 1 | |||
| ITEM 1A. RISK FACTORS | 6 | |||
| ITEM 1B. UNRESOLVED STAFF COMMENTS | 6 | |||
| ITEM 2. PROPERTIES | 6 | |||
| ITEM 3. LEGAL PROCEEDINGS | 6 | |||
| ITEM 4. MINE SAFETY DISCLOSURES | 6 | |||
| PART II | ||||
| ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | 7 | |||
| ITEM 6. SELECTED FINANCIAL DATA | 7 | |||
| ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 8 | |||
| ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 12 | |||
| ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | 13 | |||
| ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND | 25 | |||
| FINANCIAL DISCLOSURE | ||||
| ITEM 9A. CONTROLS AND PROCEDURES | 25 | |||
| ITEM 9B. OTHER INFORMATION | 25 | |||
| PART III | ||||
| ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE | 26 | |||
| ITEM 11. EXECUTIVE COMPENSATION | 30 | |||
| ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND | 31 | |||
| RELATED STOCKHOLDER MATTERS | ||||
| ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | 31 | |||
| ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES | 31 | |||
| PART IV | ||||
| ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES | 33 | |||
| SIGNATURES | 35 | |||
PART I
This annual report on Form 10-K contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about the Company, us, our future performance, our beliefs and our Management’s assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict or assess. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. Except as required under the federal securities laws and the rules and regulations of the SEC, we do not have any intention or obligation to update publicly any forward-looking statements after the filing of this Form 10-K, whether as a result of new information, future events, changes in assumptions or otherwise.
References to “our,” “we,” “us,” or “the Company” “our Company,” refer to Acology, Inc. and its subsidiaries, unless the context requires otherwise “Acology” refers to Acology, Inc. “Distributors” refers to D&C Distributors LLC, a California limited liability company and our wholly owned subsidiary. “Printing” refers to D&C Printing LLC, o a California limited liability company and our wholly owned subsidiary.
ITEM 1. BUSINESS
Through Distributors, we are in the business of designing, manufacturing, branding and selling proprietary plastic medical grade containers that can store pharmaceuticals, herbs, teas and other solids or liquids, some of which can grind solids and shred herbs. While some of our marketing to date has related to the use of these containers for marijuana-related purposes, we have received child safety certification for our 20-dram container and we are focusing our marketing efforts on drug stores and drug store chains, veterinarians and veterinary distributors and other distributors and end users. Through Printing, we are in the business of private labeling and branding for purchasers of containers and other products. For more detailed information as to our business and our plans to develop it, see “Description of Business.” Acology’s operating subsidiary, Distributors, which Acology acquired on March 28, 2014, commenced operations on January 29, 2013, and Printing commenced operations on April 14, 2015.
The address of the Company is 1620 Commerce St., Corona, CA 92880 and its telephone number is (844) 226-5649.
Our History
Acology was incorporated on September 9, 1997, in the State of Florida.
On December 24 , 2013, Acology, a wholly-owned subsidiary of Acology and Distributors entered into an Agreement and Plan of Merger under which Distributors became the wholly owned subsidiary of Acology on March 4, 2014. Prior to the merger, Acology was a shell company. As a result of the Merger, Acology became an operating company. In connection with the Merger, Acology issued 3,846,000,000 shares of Common Stock to Curtis Fairbrother and Douglas Heldoorn, the holders of all of the membership units in Distributors, who thereby became Acology’s controlling shareholders, in exchange for those units. Upon the closing of the Merger, the existing officer and sole director of Acology resigned and Messrs. Fairbrother and Heldoorn became its officers and directors.
Also in connection with the Merger:
| • | On March 4, 2014, Acology completed a private placement with 3 investors of 700,000,000 shares of Common Stock for proceeds of $40,000 in cash. The price paid by each investor was $0.000571429 per share. Acology also entered into Registration Rights Agreements with these investors, under which Acology filed a registration statement under the Securities Act of 1933 covering the shares issued in the Private Placement, which was declared effective on August 6, 2014. For further information about the participation of a corporation owned by our president and sole director until March 4, 2014, in the Private Placement, see “Directors, Executive Officers, Promoters and Control Persons - Related Party Transactions – Private Placement.” |
| • | Prior to the Merger, our president and sole director until March 4, 2014, entered into an Exchange Agreement with Acology, under which 35,000,000 shares of the Common Stock beneficially owned by him and $151,269 of Acology’s indebtedness to him were exchanged for the proceeds of the Private Placement and a secured convertible promissory note of Acology payable to him in the principal amount of $400,000 and bearing interest at the rate of 0.28% per annum; a prepayment if $40,000 was made on that date, leaving a balance of $360,000. The convertible promissory note matured on March 4, 2015, but its maturity date has been extended to September 14, 2016, is subject to acceleration in the event of certain events of default, contains certain restrictive covenants and is secured by a pledge of all of the units of Distributors. The unpaid principal amount of the convertible promissory note and the interest accrued thereon is convertible as a whole or in part from time to time into an indeterminate number of shares of Common Stock at a conversion price per share equal to 50% of the average of the daily closing prices for a share of Common Stock for the 3 consecutive trading days ending on the trading day immediately prior to the day on which the convertible promissory note is delivered for conversion. For further information respecting the convertible promissory note, certain risks associated with it and the pledge, see “Directors, Executive Officers and Control Persons – Related Parties – Exchange Transaction.” |
| • | On January 9, 2014, the articles of incorporation were amended (i) to change our corporate name to Acology, Inc., (ii) to increase the number of the authorized shares of common stock to 6,000,000,000 and (iii) to reverse split the common stock on the basis of 1 new share for 1,000 existing shares. The reverse stock split was applicable to shares held by shareholders of record on February 14, 2014, and was implemented on that date. |
As a result of the Merger, we are in the business of designing, manufacturing, branding and selling proprietary plastic medical grade containers that can store, and grind and shred, pharmaceuticals, herbs, teas and other solids or liquids. For more detailed information as to our business and our plans to develop it, see “Description of Business.”
DESCRIPTION OF BUSINESS
Introduction
Acology is the parent of Distributors and Printing. Acology has no material assets other than all of the outstanding membership units of Distributors and the membership units of Printing and has no plans to conduct any business activities other than obtaining or guaranteeing financing for the businesses conducted by its subsidiaries or assisting them in obtaining such financing.
Through Distributors and Printing, we are in the business of designing, manufacturing, and selling containers that can store, grind and shred pharmaceuticals, herbs, teas and other solids or liquids. Our principal product is the Medtainer®, which is described below under “Products.” Through Printing, we are in the business or custom labeling our products and products manufactured by others.
We market directly to businesses through our phone room, to the retail public through internet sales and, and to wholesalers and other businesses who resell our products to other businesses and end users. See “Description of Business – Sales and Distribution.”
As indicated above, our products can store and grind many substances. Our products are manufactured using medical-grade resin because we intended to market them for use in grinding pills for administration to children and other persons who have difficulty swallowing and to pets. Our 20-dram Medtainer® has received child safety certification.
In light of the facts that the possession and use of marijuana have been legalized, subject to varying restrictions, in many states and that several other states are considering such legalization, we believe that our products may be of interest to a large number of users of marijuana in and we advertise our products on our website and elsewhere as suitable for that purpose. However, since we do not seek information from our customers who are end users as to how they intend to utilize our products and have no similar knowledge respecting end users of products sold through our distributor, we are unable to determine the extent of its use in connection with the storage and grinding of marijuana or any other purpose. We believe that marketing our products to users of marijuana subject us to the following risks.
| • | The use of marijuana for medical and recreational use is lawful in many states, but under United States federal law and the laws of the other states, the possession, use, cultivation, storage, processing and/or transfer of marijuana is illegal. Federal and state law enforcement authorities have prosecuted persons engaged in these activities. While we do not believe that we engage in any of these activities, any of these law enforcement authorities might bring an action against us in connection with the engagement of others in them, including, but not limited, to a claim of aiding and abetting their criminal activities. Such an action would have a material and adverse effect on our business and operations. |
| • | Under United States federal law, it is unlawful to sell or offer for sale, to use the mails or any other facility of interstate commerce to transport or to import or export drug paraphernalia. The term “drug paraphernalia” includes any equipment, product or material of any kind which is primarily intended or designed for use in manufacturing, compounding, converting, concealing, producing, processing, preparing, injecting, ingesting, inhaling, or otherwise introducing into the human body a controlled substance. One of the factors that these authorities may consider in determining whether our products are drug paraphernalia are our national and local advertising concerning its use and we have advertised our products as usable for marijuana-related purposes. However, we do not believe that our products were designed or are intended for any of these purposes or that our products are drug paraphernalia, as defined in federal law, and we are promoting our products primarily to be used for other purposes. If federal authorities were to take a different view, they might bring a criminal action against us. Such an action would have a material and adverse effect on our business and operations. |
Products
The Medtainer® stores herbs and herbal remedies, medicines, coffee and teas, wines and liquors, foods and other solids and liquids without cross-contamination. Some configurations have a built-in grinder in order that non-liquids that it carries may be ground into powder in the case of medicines or shredded in the case of herbs. The Medtainer® is manufactured from medical-grade polypropylene resin, is air- and water-tight, non-porous and non-leaching. We currently sell the Medtainer® in a 20-dram child resistant version and our 20-dram original version, a 20 dram non-child resistant version and a 40 non-child resistant version. Medtainer®. We plan to sell the Medtainer® in several other configurations. We sell our products with and without logos and other markings.
As indicated by the picture below, the Medtainer® with a grinder/shredder has three components. The top component is a cap, the middle component is a storage cup with grinding/shredding teeth projecting downward from its bottom and the bottom component is a grinding/shredding cup with teeth projecting upward from its bottom. Material is transferred from the storage cup into the grinding/shredding cup, the storage cup is inserted into the grinding/shredding cup, forming a space in which the two sets of teeth intermesh, and the two cups are then rotated manually such that the material passes between the two sets of teeth and is ground or shredded. The ground or shredded material may then be returned to the storage cup for storage or used or dispensed in another manner. The cap attaches to the grinding/shredding cup such that the storage cup is held between them, forming a compact unit which is air- and water-tight between the cap and the storage cup, as well as between the storage cup and the bottom cup.
Medtainers® without grinding capacity will have only a cap and a storage container.
In the future, we may sell containers other than the Medtainer® that will give consumers the ability to easily store, carry and consume various solids and liquids.
We have acquired an inventory of cigarette lighters and “smellproof” bags, but have not determined when or how we will market them.
Source of Products
We do not manufacture, and for the foreseeable future do not plan to manufacture, our products. We acquire our products from Polymation Medical Products, LLC (“Polymation”), a pharmaceutical container manufacturer located in Newbury Park, California, under an agreement that we entered into with Polymation on August 13, 2013, under which we purchase all of our Medtainers®. The agreement has an initial term of 10 years and is extendible for a like term by mutual consent. Under this agreement, we have the exclusive worldwide right to purchase, promote, advertise, market, distribute and resell the Medtainer®, which respect to which the owner of Polymation holds a patent. The agreement requires minimum purchases (see the following paragraphs), sets prices for the products that we purchase, subject to increase because of changes in the local consumer-price index and increases in Polymation’s cost of materials, rent and utilities. Polymation is currently unable to meet our requirement of 45,000 units per month because it does not have sufficient production capacity to meet it. Polymation is now 19,420 units short of the units that we have ordered, for which we have prepaid $10,683, and is in default under our agreement with it. We are discussing with Polymation ways in which it can meet our needs for its products.
Under the agreement with Polymation, we were initially required to purchase at least 30,000 units per month, with that requirement increasing by 10% on each anniversary of the effective date of the agreement. We are now required to purchase at least 33,000 units per month.
Also, under this agreement, (i) we assigned the registered trademark “Medtainer” to Polymation, (ii) we received an exclusive license to use that trademark, (iii) we received a right of first refusal to acquire Polymation’s business on the same terms offered by a bona fide, arm’s-length, third-party buyer with a 50% discount from the price offered by such buyer, and (iv) we agreed that, in the event that Distributors (or its successor, assignee or affiliate) were to form a new corporation for the purpose of selling the products that we acquire under the agreement, Distributors would cause such corporation issue to the owner of Polymation one percent of such corporation’s authorized preferred and voting shares.
We presently have no other suppliers, but may seek them out in connection with the manufacture of containers other than Medtainers®.
Sales and Distribution
As indicated above, we sell approximately 99% of our products to wholesalers and distributors, who resell them to businesses and consumers, both in unmarked and custom-labeled form, and the remainder directly to retail consumers through internet sales. In 2014, we sold approximately 123,000 units and during 2015, we sold approximately 314,000 units. During the first quarter of 2016, we sold approximately 100,000 units. We currently have approximately 111,000 units in inventory.
We have entered into a Product License and Distribution Agreement, dated April 1, 2014, with IGreen Planet Store, Ltd. (“IGreen”), a Canadian distribution company located in Vancouver, British Columbia, Canada. Under this agreement, we have granted to IGreen an exclusive license to market, sell and distribute the Medtainer® in Canada. The agreement has a 5-year term. We are required to maintain product liability insurance covering the products sold under the agreement. We are in the process of obtaining such insurance. IGreen is not required to purchase a minimum quantity of our products. The agreement is subject to yearly reviews by the parties in respect of price, quantities ordered and other matters. Based upon these reviews, the parties may modify, amend or revoke the agreement.
We entered into an oral agreement, on September 30, 2013, with TSD Worldwide (“TSD”), a distribution company located in Santa Fe Springs, California. Under this agreement, as amended in writing on November 18, 2013, TSD acted as our exclusive U.S. seller of designated products, except that we retained the right to sell products over our website. TSD failed to meet sales goals and we terminated the agreement with TSD in June 2014.
In mid-2014, our sales staff presently comprised our two officers. We now have 13 sales personnel, including our two officers, who make sales in our phone room and over our website.
We also have a presence on Facebook, Twitter and other social media. We believe that social media are important to our marketing program for our products.
Printing
Printing commenced operations on April 15, 2015, and is in the early stage of its development, accounting for less than 1% of our sales. We formed it because some of our customers desired to have custom labels imprinted on the products that they purchased from us and we found that the cost of doing so through third parties raised the price that we charged to customers for imprinted product to levels that we believed would impede sales. Printing is performed using specialized printers. We currently have one printer and have ordered another. We are also seeking business from businesses that require labelling on their own products.
Patents, Trademarks and Other Intellectual Property
Our Medtainer® is covered by a patent held by Polymation. As we develop our own products, we may rely on a combination of patents, trade secrets, unpatented know-how, trademarks, copyrights and other intellectual property rights, nondisclosure agreements and other protective measures to protect our proprietary rights. We believe that the patent owned by Polymation is material to our business, but we cannot presently ascertain the extent to which intellectual property that we may develop or license will be important to us.
We employ various methods, including confidentiality and non-disclosure agreements with third parties, employees and consultants, to protect our trade secrets and know-how. We have licensed a patent that we own to Polymation and may license in the future, patents, trademarks, trade secrets and similar proprietary rights to and from third parties.
Competition
We believe that the Medtainer® is a unique product and that there is presently no product that competes with it. However, even though it is patented, we cannot assure that a product that can store and grind substances without conflicting with this patent cannot be developed. In addition, we face intense competition in the sale of our products and compete with multiple companies principally on the basis of price, service, quality, product characteristics and the ability to supply products to customers in a timely manner. Our products also compete with metal, glass, paper and other packaging materials as well as plastic and resin packaging materials made through different manufacturing processes. Most of our existing and potential competitors have greater brand name recognition and their products may enjoy greater initial market acceptance among our potential customers. In addition, many of these competitors have significantly greater financial, technical, sales, marketing, distribution, service and other resources than we have and may also be better able to adapt quickly to customers’ changing demands and changes in technology, to enhance existing products, to develop and introduce new products and new production technologies and to respond timely changing market conditions and customer demands. If we are not able to compete successfully in the face of our competitors’ advantages, our ability to gain market share or market acceptance for the products that we sell could be limited, our revenues and our profit margins could suffer, and we may never become profitable.
While we believe that the patent under which our Medtainer® is manufactured (see “Description of Business – Patents, Trademarks and Other Intellectual Property”) may afford us some protection from competition by similar products, no assurance can be given that a competing product cannot be developed without infringing our patent.
We seek to differentiate ourselves from our competitors by the uniqueness of our products, by building a reputation for high-quality products and innovation and by maintaining strong relationships with our distributors and, where possible, their and our customers.
Regulation
The Food and Drug Administration (the “FDA”) regulates the material content of our products, including the medical-grade polypropylene resin used in the manufacture of the Medtainer®, pursuant to the Federal Food, Drug and Cosmetic Act and the Consumer Product Safety Commission (the “CPSC”) regulates certain aspects of our products pursuant to various federal laws, including the Consumer Product Safety Act and the Poison Prevention Packaging Act. The FDA and the CPSC can require the manufacturer of defective products to repurchase or recall these products and may also impose fines or penalties on the manufacturer. Similar laws exist in some states, cities and other countries in which we sell or intend to sell our products. In addition, certain state laws restrict the sale of packaging with certain levels of heavy metals and impose fines and penalties for noncompliance. Although FDA-approved resins and pigments are used in our products that directly contact food and drugs and we believe our products are in material compliance with all applicable regulatory requirements (although we are not required to submit them to either the FDA or the CPSC for review), we are remain subject to the risk that our products could be found not to be in compliance with these and/or other requirements. A recall of any of our products or any fines and penalties imposed in connection with noncompliance could have a materially adverse effect on us.
We are not required to submit the Medtainer® for review by either agency.
Employees
In mid-2014, we had 2 employees, namely, the Company’s two officers. We now have, in addition to these officers, 11 sales personnel and 4 administrative personnel.
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide information under this item.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As we are not an accelerated filer or a large accelerated filer, as defined in Rule 12b-2 of the Exchange Act, or a well-known seasoned issuer, as defined in Rule 405 promulgated under the Securities Act, we are not required to provide information under this item.
ITEM 2. PROPERTIES
All of our operations are located at 1620 Commerce St., Corona, CA 92880. We lease this property, comprising approximately 7,000 square feet, for $6,300 per month plus 55% of the operating expenses, as defined in the lease. The term of the lease is 2 years, expiring on August 31, 2016. In June 2015, the lease was amended to increase the leased space to approximately 10,000 square feet at a rental of $7,500 per month, plus 100% of the operating expenses, as defined in the lease.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is quoted on the OTC Pink tier maintained by OTC Markets Inc. under the symbol “ACOL.”
The following table reflects the high and low closing bid information for our common stock for each fiscal quarter during the fiscal years ended December 31, 2015, and 2014, and the year to date. The bid information was obtained from the OTC Markets, Inc. and reflects prices between dealers, without retail mark-up, markdown or commission, and may not represent actual transactions.
| Closing | Closing | |||||||
| Quarter Ended | Bid High | Bid Low | ||||||
| Fiscal Year 2016 | ||||||||
| June 30, 2016 (through April 12, 2016) | $ | 0.0010 | $ | 0.0008 | ||||
| March 31, 2016 | $ | 0.0013 | $ | 0.0006 | ||||
| Fiscal Year 2015 | ||||||||
| December 31, 2015 | $ | 0.0022 | $ | 0.0006 | ||||
| September 30, 2015 | $ | 0.0037 | $ | 0.0002 | ||||
| June 30, 2015 | $ | 0.0043 | $ | 0.0028 | ||||
| March 31, 2015 | $ | 0.0251 | $ | 0.0025 | ||||
| Fiscal Year 2014 | ||||||||
| December 31, 2014 | $ | 0.535 | $ | 0.03 | ||||
| September 30, 2014 | $ | 1.25 | $ | 0.10 | ||||
| June 30, 2014 | $ | 1.25 | $ | 1.25 | ||||
| March 31, 2014 | $ | 3.00 | $ | 1.25 | ||||
The prices in the above table have been adjusted for a 1-for-1,000 reverse stock split that was implemented on February 14, 2014.
Until the quarter beginning September 1, 2014, following the consummation of the Merger and the effectiveness of a registration statement filed under the Securities Act respecting 335,200,000 shares of common stock held by certain of our stockholders, trading in our common stock was sporadic and the amounts of shares traded were very small. We do not believe that the information provided in the table above for periods prior to that date reflect the value or the prospects of the Company as it now exists.
As of April 11, 2016, there were approximately 400 holders of record of our common stock.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide information under this item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The financial data discussed below are derived from the audited consolidated financial statements of the Company as at December 31, 2015, which were prepared and presented in accordance with generally accepted United States accounting principles. These financial data are only a summary and should be read in conjunction with the financial statements and related notes contained elsewhere herein, which more fully present our financial condition and operations as at that date. We do not believe that the results set forth in these consolidated financial statements are necessarily indicative of our future performance. This section and other parts of this report contain forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements.
Overview
From the formation of Distributors on January 29, 2013, until December 31, 2014, we organized, acquired our office space, entered into contracts for the purchase and distribution of our products, established one of our websites, sold products to our distributors and end users, developed our in-house sales capacity, completed a merger whereby we became a public company and completed a private placement.
We will need a substantial amount of additional capital to fund our business. No assurance can be given that any additional capital can be obtained or, if obtained, will be adequate to meet our needs and we may need to take certain measures to remain a going concern. See “Liquidity and Capital Resources.” If adequate capital cannot be obtained on a timely basis and on satisfactory terms, our operations would be materially negatively impacted or we could be forced to terminate operating.
Our audited consolidated financial statements were prepared on the basis that Distributors was the accounting acquirer in the Merger.
Results of Operations
The following table summarizes the operating results of the Company for the years ended December 31, 2015, and December 31, 2014:
Year Ended December 31, 2015, Compared with the Period Ended December 31, 2014
Sales: Our sales for the year ended December 31, 2015, were $1,441,441, from which we earned a gross profit of $1,213,236. Our sales for the year ended December 31, 2014, were $460,756, from which we earned a gross profit of $315,716. The principal reason for the increase in sales and gross profit from the earlier to the later period was increased sales volume combined with cost of sales that increased at a rate lower than the rate by which sales volume increased.
Operating Expenses: For the year ended December 31, 2015, operating expenses of $1,493,579 were incurred, including $1,285,317 for general and administrative expenses, of which $221,984 was for compensation of our officers, and $208,262 for advertising and marketing expenses. For the year ended December 31, 2014, operating expenses of $689,061 were incurred, including $625,795 for general and administrative expenses, of which $228,650 was for compensation of our officers, and $63,266 for advertising and marketing expenses.
The principal reasons for the increase in general and administrative expense were an increase in personnel costs, which were $187,426 in the earlier period, compared with $487,694 in the later period, and advertising costs, which were $63,266 in the earlier period and $$208,262 in the later period. Both of these costs increased principally because of our decision to market our products aggressively.
Loss from Operations. Loss from operations decreased from $373,345 for the year ended December 31, 2014, to $280,343 for the year ended December 31, 2015, because sales increased substantially, while cost of sales and general and administrative expenses, although higher for the later period, were each a lower percentage of sales in the later period than in the earlier period. Specifically, Cost of Sales was 15.8% of Sales in the later period, versus 31.5% in the earlier period and General and Administrative Expenses was 89.1% of Sales during the later period, versus 135.8% of Sales in the earlier period.
Interest Expense . During the year ended December 31, 2015, and 2014, we incurred interest expense of $675,528 and $19,257, respectively. The increase in interest expense resulted principally from the excess of $534,434 of the fair value of the embedded conversion feature of the note over its principal amount, which excess is charged as interest upon inception. In addition, we incurred $91,814 of interest expense for amortization of debt discount.
Gain on Extinguishment of Debt. During the year ended December 31, 2015, we incurred a gain of extinguishment of debt of $16,365 as the result of the conversion of convertible debt with a bifurcated conversion feature.
Gain on Change of Fair Value of Derivative. During the year ended December 31, 2015, we incurred a gain on change in fair value of derivative of $155,251 as the result of the lower fair value of the derivative liability, which is adjusted to fair value each reporting period, due to a decrease in the underlying stock price.
Net Loss: Although our loss from operations decreased from $373,345 for the year ended December 31, 2014, to $280,343 for the year ended December 31, 2015, our net loss was $799,360, as compared with a net loss of $407,604 for the year ended December 31, 2014. The principal reasons for this difference were the higher levels of interest expense and of general and administrative expenses, advertising and marketing expenses during the latter period, which were offset by the gain on extinguishment of debt and gain on change in fair market value of derivative and increased sales.
Liquidity and Capital Resources
As of December 31, 2015, we had $37,533 in cash and accounts receivable of $30,734. We financed our operations from the inception of our business on January 19, 2013, through December 31, 2013, through capital contributions of $141,986 made by our officers in 2013, a $40,000 private placement and loans of $759,847 during the year ended December 31, 2014, and loans of $175,147 during the year ended December 31, 2015.
We commenced business in January 2013. Our sales grew over the course of 2013, averaging 11,500 units per month for 2013. During the year ended December 31, 2014, we sold approximately 180,000 units. During the year ended December 31, 2015, we sold an approximately 314,000 units. We sold approximately 104,000 units in the first quarter of 2016.
We have a current inventory of approximately 111,000 containers, which we believe will be sold for approximately $604,000.
On April 14, 2015, Printing commenced operations. For a description of its business, see “Description of Business-Printing”
The Company believes that it will require approximately $1,500,000 in additional funding for the next 12 months, including $1,099,500 to repay loans that will become due during this period, assuming that the Company’s operating loss remains at the same level. The Company plans to seek extensions of these loans, in which case the amount of such funding will be reduced, but cannot give assurances as to the extent that it will be successful. The Company plans to fund its activities, during the balance of 2015 and beyond through loans from banks and other financial institutions and the sale of debt or equity securities to private investors. The Company can give no assurance that it will be successful in so doing or that such funding, if available, can be obtained on acceptable terms.
The Company’s sales have grown every year since in commenced business. In 2013, its sales were $254,992; in 2014, they were $460,756; and in 2015, were $1,441,441. Although its operating expenses have increased in each year, and it has yet to become profitable. The Company has devoted, and Management believes that the Company should continue to devote, manpower and capital to increasing its sales to the extent that it is available and prudent. For this reason, it has increased its sales staff two 2 in 2013 to 12 today and its advertising and marketing expenses from $51,476 in 2013 to $208,262 in 2015. Management further believes that increased sales will ultimately exceed operating expenses. However, as indicated in note 3 of the Notes to Financial Statements, there are substantial doubts as to the ability of the Company to continue as a going concern and Management recognizes that the Company can take measures to increase sales only within the parameters set forth therein.
We can give no assurance that any of the funding described above will be available on acceptable terms, or available at all. If we are unable to raise funds in sufficient amount, when required or on acceptable terms, we may have to significantly reduce, or discontinue, our operations. To the extent that we raise additional funds by issuing equity securities or securities that are convertible into Acology’s equity securities, its shareholders may experience significant dilution.
Plan of Operations
In August 2014, we announced our significant objectives. The following sets forth our progress in meeting those objectives:
| • | We planned to secure funding of $1,500,000 to support our operations. Of that amount, we have obtained approximately $850,000. However, as indicated above, we again need funding of $1,500,000. We can give no assurance that any or all of the remaining portion of such funding will be available on acceptable terms, or available at all. |
| • | We planned to hire additional personnel and now have 18 employees. We plan to hire additional sales, administrative personnel and technical personnel as needed. |
| • | Increasing sales volume to 50,000 containers per month. During 2014, we sold an average of 10,250 units per month and in 2015, we sold an average of 26,000 units per month. During the first quarter of 2016, we sold an average of 37,300 units per month. Our ability to reach this goal, as indicated above, is limited by the manufacturing capacity of Polymation. |
| • | We announced that we intended to lease a building for our operations, including administrative and warehouse space and acquire office furniture, equipment and materials (forms, corporate stationary and business cards). We attained this objective and have leased additional space. |
| • | We announced that we would seek additional international distributors meeting certain criteria. In light of our decision to concentrate on direct sales to customers, we have determined not to pursue this objective. |
| • | We have attended trade shows, expos and conferences and believe that this activity in part accounts for our increased sales. |
| • | We have initiated a marketing and advertising campaign, which includes maintaining and periodically updating our websites, brochures and other advertising materials and attending industry events. |
| • | We announced that we would attempt to pay the convertible promissory note in the principal amount of $400,000. We have reduced the principal amount of this note to $250,000 though conversions. For further information, see “Directors, Executive Officers and Control Persons – Related Parties – Exchange Transaction.” |
| • | We announced that we desired to pay salaries of $10,000 per month to each of Messrs. Fairbrother and Heldoorn on a regular basis after the other goals are completed. We are now doing so. |
Contractual Obligations
The following table sets forth information with respect to our known contractual obligations as of December 31, 2015, setting forth their types and the times at which they are due.
Payments due by period
| Less than 1 | More than 5 | |||||||||||||||||||
| Contractual obligations | Total | Year | 1-3 years | 3-5 years | Years | |||||||||||||||
| Long-Term Debt Obligations | $ | 1,159,500 | $ | 1,159,500 | 0 | 0 | 0 | |||||||||||||
| Capital Lease Obligations | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
| Operating Lease Obligations | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
| Purchase Obligations* | $ | 2,841,581 | $ | 180,000 | $ | 648,760 | $ | 863,498 | 1,149,323 | |||||||||||
| Other Long-Term Liabilities Reflected on Our | ||||||||||||||||||||
| Balance Sheet under GAAP | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
| Total | $ | 3,961,428 | $ | 180,000 | $ | 648,760 | $ | 863,498 | 1,149,323 | |||||||||||
* All of these purchase obligations arise under our agreement with Polymation, at current prices, which are subject to escalation to a presently unknowable extent for inflation and certain increased costs.
Off-Balance Sheet Arrangements
None.
Controls and Procedures
The Company’s management is required to report on the effectiveness of its internal control over financial reporting in each of its annual reports. That report appears in Item 9A.
Risks and Uncertainties
We operate in an industry that is subject to rapid and sometimes unpredictable change. Our operations will be subject to significant risk and uncertainties, including financial, operational and other risks, including the risk of business failure. Further, the Company will require substantial capital resources.
Critical Accounting Policies and Estimates
Use of Estimates.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from estimates.
Revenue Recognition .
The Company followed the guidance of the SEC’s Staff Accounting Bulletin No. 104 for revenue recognition. The Company records revenue when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) product delivery has occurred, (3) the sales price to the customer is fixed or determinable, and (4) collectability is reasonably assured.
JOBS Act
Section 102(b)(1) of the JOBS Act provides that, as an emerging growth company, Acology (A) need not present more than 2 years of audited financial statements in order for Acology’s registration statement with respect to an initial public offering of common equity securities to be effective, and in any other registration statement that Acology files with the SEC, Acology need not present selected financial data prescribed by the SEC in its regulations for any period prior to the earliest audited period presented in connection with Acology’s initial public offering; and (B) may not be required to comply with any new or revised financial accounting standard until such date that a company that is not an issuer (as defined under section 2(a) of Sarbanes-Oxley is required to comply with such new or revised accounting standard, if such standard applies to companies that are not issuers. The term “issuer” generally means any person who issues or proposes to issue any security, the securities of which are registered under section 12 of the Exchange Act or that is required to file reports under section 15(d) of the Exchange Act, or that files or has filed a registration statement that has not yet become effective under the Securities Act and that it has not withdrawn.
While Acology is permitted to opt out of these provisions of the JOBS Act, it has not done so and do not intend to do so. As a result, our financial statements may not be comparable to companies that that elect to opt out of these provisions.
I ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide information under this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
| Index to Financial Statements | PAGE(S) | |||
| Report of Independent Registered Public Accounting Firm | 14 | |||
| Balance Sheets as of December 31, 2015, and December 31, 2014 | 15 | |||
| Statements of Operations for the Year Ended December 31, 2015 and the Year Ended December 31, 2014 | 16 | |||
| Statements of Cash Flows for the Year Ended December 31, 2013 and the Year Ended December 31, 2014 | 17 | |||
| Statement of Changes in Stockholders’ Deficit as at December 31, 2015 | 18 | |||
| Notes to Financial Statements | 19 | |||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders’
Acology, Inc.
We have audited the accompanying consolidated balance sheets of Acology, Inc. as of December 31, 2015 and 2014 and the related consolidated statements of operations, changes in stockholders’ deficiency and cash flows for the years ended December 31, 2015 and 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Acology, Inc.as of December 31, 2015 and 2014, and the results of its operations and cash flows for the years ended December 31, 2015 and 2014 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As discussed in Note 3 the Company has a stockholders’ deficit of $1,422,273 and a working capital deficit of $1,484,743 at December 31, 2015. In addition, the Company has generated operating losses since inception and has notes payable that are currently in default. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. Management plans are also discussed in Note 3.The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/S/ Paritz & Company, P.A.
Hackensack, New Jersey
April 14, 2016
| ACOLOGY, INC. | ||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||
| December 31, 2015 | December 31, 2014 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | 37,533 | $ | 261,233 | ||||
| Accounts Recievable | 30,734 | 22,011 | ||||||
| Inventories | 79,941 | 51,487 | ||||||
| Note Receivable | 155,835 | — | ||||||
| Advance to supplier | 10,683 | 66,128 | ||||||
| TOTAL CURRENT ASSETS | 314,726 | 400,859 | ||||||
| Property and equipment, net of accumulated depeciation of $31,773 and $6,576 | 54,982 | 32,380 | ||||||
| Security deposits | 7,489 | 7,489 | ||||||
| TOTAL ASSETS | $ | 377,197 | $ | 440,728 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIENCY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 45,760 | $ | 18,543 | ||||
| Convertible notes payable, net of debt discount of $226,186 and $0 | 326,314 | 234,500 | ||||||
| Notes payable | 607,000 | 457,000 | ||||||
| Note payable - related party | — | 360,000 | ||||||
| Loan payable - stockholder | 93,494 | 68,347 | ||||||
| Accrued expenses | 102,908 | 32,123 | ||||||
| Derivative Liability | 623,994 | — | ||||||
| TOTAL CURRENT LIABILITIES | 1,799,470 | 1,170,513 | ||||||
| STOCKHOLDERS' DEFICIENCY | ||||||||
| Common Stock, $00001 par value, 6,000,000,000 shares authorized | ||||||||
| 4,974,621,214 and 4,546,049,785 shares issued and outstanding | ||||||||
| December 31, 2015 and 2014, respectively | 49,745 | 45,460 | ||||||
| Additional Paid in Capital | 102,857 | — | ||||||
| Accumulated Deficit | (1,574,875 | ) |
(775,245)
|
|||||
| TOTAL STOCKHOLDERS' DEFICIENCY | (1,422,273 | ) | (729,785 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY | $ | 377,197 | $ | 440,728 | ||||
The accompanying notes are an integral part of these financial statements
| ACOLOGY, INC. | ||||||||
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||
| Year Ended December 31, 2015 | Year Ended December 31, 2014 | |||||||
| Sales | $ | 1,441,441 | $ | 460,756 | ||||
| Cost of Sales | 228,205 | 145,040 | ||||||
| Gross Profit | 1,213,236 | 315,716 | ||||||
| Operating expenses: | ||||||||
| General and administrative | 1,285,317 | 625,795 | ||||||
| Advertising and marketing | 208,262 | 63,266 | ||||||
| Total operating expenses | 1,493,579 | 689,061 | ||||||
| Loss from operations | (280,343 | ) | (373,345 | ) | ||||
| Other expenses: | ||||||||
| Interest expense | 675,528 | 19,257 | ||||||
| Bad debt expense | 15,375 | 15,002 | ||||||
| Gain on extinguishment of debt | (16,365 | ) | — | |||||
| Gain on change in fair value of derivative | (155,251 | ) | — | |||||
| Total other expenses | 519,287 | 34,259 | ||||||
| Loss before income taxes | (799,630 | ) | (407,604 | ) | ||||
| Income tax provision | — | — | ||||||
| Net Loss | $ | (799,630 | ) | $ | (407,604 | ) | ||
| Loss per common share | $ | (0.00 | ) | $ | (0.00 | ) | ||
| Weighted average common shares outstanding | 4,693,224,039 | 4,426,781,123 | ||||||
The accompanying notes are an integral part of these financial statements
The accompanying notes are an integral part of these financial statements
| ACOLOGY, INC. | ||||||||||||||||||||
| CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY | ||||||||||||||||||||
| Additional | ||||||||||||||||||||
| ------COMMON STOCK------ | Paid-In | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| BALANCE – January 1, 2014 | 3,846,000,000 | 38,460 | 103,526 | (104,167 | ) | 37,819 | ||||||||||||||
| Effect of Reverse Merger | 49,785 | — | (136,526 | ) | (263,474 | ) | (400,000 | ) | ||||||||||||
| Issuance of common stock in private placement | 700,000,000 | 7,000 | 33,000 | — | 40,000 | |||||||||||||||
| Net Loss | (407,604 | ) | (407,604 | ) | ||||||||||||||||
| BALANCE – December 31, 2014 | 4,546,049,785 | 45,460 | — | (775,245 | ) | (729,785 | ) | |||||||||||||
| Issuance of common stock upon conversion of convertibel debt | 428,571,429 | 4,285 | 102,857 | — | 107,142 | |||||||||||||||
| Net Loss | (799,630 | ) | (799,630 | ) | ||||||||||||||||
| BALANCE – December 31, 2015 | 4,974,621,214 | 49,745 | 102,857 | (1,574,875 | ) | (1,422,273 | ) | |||||||||||||
The accompanying notes are an integral part of these financial statements
Acology, Inc.
Notes to Financial Statements
December 31, 2015
NOTE 1 – Business
Acology, Inc. (the “Company”), through its wholly owned subsidiary, D&C Distributors, LLC (“D&C”) is in the business of designing, manufacturing, branding and selling proprietary plastic medical grade containers that can store pharmaceuticals, herbs, teas and other solids or liquids, some of which can grind solids and shred herbs, and through D&C’s wholly owned subsidiary, D&C Printing LLC (“Printing”), is in the business of private labeling and branding for purchasers of containers and other products.
D&C and Printing were formed under the laws of the State of California on January 29, 2013, and April 14, 2015, respectively.
On March 4, 2014, the Company completed an agreement and plan of merger in connection with which the holders of the membership units in D&C received 3,846,000,000 shares of the Company in exchange for these units. The merger was accounted for as a reverse merger in which D&C was the accounting acquirer.
NOTE 2 - Summary of Significant Accounting Policies
Principals of Consolidation
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Certain of the Company’s estimates could be affected by external conditions, including those unique to its industry, and general economic conditions. It is possible that these external factors could have an effect on the Company’s estimates that could cause actual results to differ from its estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and record adjustments when necessary.
Cash
The Company considers all short-term highly liquid investments with an original maturity at the date of purchase of three months or less to be cash equivalents.
Revenue Recognition
The Company follows the guidance of the Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition. We record revenue when persuasive evidence of an arrangement exists, product delivery has occurred, the selling price to the customer is fixed or determinable and collectability of the revenue is reasonably assured. The Company has not experienced any significant returns from customers and accordingly, in management’s opinion, no reserve for returns has been provided.
Inventories
Inventories, which consist of the Company’s product held for resale, are stated at the lower of cost, determined using the first-in first-out, and net realizable value. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose of the product.
If the Company identifies excess, obsolete or unsalable items, its inventories are written down to their realizable value in the period in which the impairment is first identified. Shipping and handling costs incurred for inventory purchases and product shipments are recorded in cost of sales in the Company’s statements of operations.
Fair Value Measurements
The Company adopted the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments. The carrying amounts of our short and long term credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
| • | Level 1 – quoted prices in active markets for identical assets or liabilities |
| • | Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable |
| • | Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions) |
The derivative liability in connection with the conversion feature of the convertible debt, classified as a Level 3 liability, is the only financial liability measure at fair value on a recurring basis.
The change in the Level 3 financial instrument is as follows:
| Balance, January 1, 2014 | $ | — | ||
| • Issued during the Year ended December 31, 2015 | 902,434 | |||
| • Converted during the Year | (123,189 | ) | ||
| • Change in fair value recognized in operations | (155,251 | ) | ||
| Balance, December 31, 2015 | $ | 623,994 |
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided for on a straight-line basis over the useful lives of the assets. For furniture and fixtures the useful life is five years, Leasehold Improvements are depreciated over the two year lease term. Expenditures for additions and improvements are capitalized; repairs and maintenance are expensed as incurred.
Convertible Instruments
The Company evaluates and account for conversion options embedded in convertible instruments in accordance with ASC 815 “ Derivatives and Hedging Activities ”.
Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
The Company accounts for convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: The Company records when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.
The Company accounts for the conversion of convertible debt when a conversion option has been bifurcated using the general extinguishment standards. The debt and equity linked derivatives are removed at their carrying amounts and the shares issued are measured at their then-current fair value, with any difference recorded as a gain or loss on extinguishment of the two separate accounting liabilities. During the year ending December 31, 2015, the Company recognized a gain on extinguishment of $16,365 from the conversion of convertible debt with a bifurcated conversion option.
Advertising
Advertising and marketing expenses are charged to operations as incurred.
Income Taxes
The Company use the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, Income Taxes. Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.
ASC Topic 740.10.30 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740.10.40 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company has no material uncertain tax positions.
Recent accounting pronouncements
The Company does not believe there are any recently issued, but not yet effective; accounting standards that would have a significant impact on the Company’s financial position or results of operations.
NOTE 3 – Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At December 31, 2015, the Company had a stockholders’ deficit of $1,422,273 and a working capital deficit of $1,484,743. In addition, the Company has generated operating losses since inception and has notes payable that are currently in default. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the successful execution of its operating plan which includes increasing sales of existing products while introducing additional products and services, controlling operation expenses, negotiating extensions of exisitng loans and raising either debt or equity financing. There is no assurance that we will be able to increase sales or to obtain extend financing on terms acceptable to us or at all.
NOTE 4 –Note Receivable
On August 11, 2015, the Company loaned $150,000 to an unrelated person who is one of the convertible noteholders referred to in
Note 6 and that person made a promissory note in a like principal amount in favor of the Company. The note accrues interest at
the highest lawful rate, but not more the 20% per annum, the Company is accruing interest at 10% per annum based on California
usury rates. Upon an event of default, as defined in the note, interest will be compounded monthly. The note matures August 11,
2016.
NOTE 5 –Property and Equipment
Property and equipment consist of:
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Furniture and Fixtures | $ | 4,793 | $ | 4,193 | ||||
| Machinery and Equipment | 54,489 | 7,291 | ||||||
| Leasehold Improvements | 27,472 | 27,472 | ||||||
| 86,754 | 38,956 | |||||||
| Accumulated Depreciation | (31,772 | ) | (6,576 | ) | ||||
| $ | 54,982 | $ | 32,380 | |||||
NOTE 6 –Convertible Notes Payable
The following is a description of convertible notes payable at December 31, 2015:
| • |
On August 20, 2015, an unrelated third party acquired the $400,000 promissory note referred to in Note 8, which had been reduced to $360,000 as the result of a prepayment. The note bears interest at 0.28% per annum. It originally matured on March 4, 2015, but its maturity has been extended to September 14, 2016, as described below. The note is subject to acceleration in the event of certain events of default, contains certain restrictive covenants, and is secured by a pledge of all the membership units in D&C. The note provided that if an event of default were to occur, the unpaid principal amount and interest accrued thereon would be convertible into shares of the Company’s common stock at a conversion price per share equal to 50% of the average daily closing price for 3 consecutive trading days ending on the trading day immediately prior to the conversion date. The note was in default when it was not paid on March 4, 2015. On August 20, 2015, the holder of the note assigned it to an unrelated third party and on September 14, 2015, the maturity of the note was extended to September 14, 2016, the holder waived all events of default and any right to receive interest at the default rate, and the Company agreed that the holder could convert the principal and interest of the note into common stock, notwithstanding the cure of defaults. On August 28, 2015, the holder converted $50,000 of principal of the note into 428,571,429 shares of common stock. The principal balance of the note at December 31, 2015 was $310,000. |
| • | A convertible promissory note, dated December 15, 2015, made in favor of the unrelated party referred to above in the principal amount of $8,000. This note is convertible into shares of the Company’s common stock at a conversion price equal to the average of the daily closing price for a share of Common Stock for the 3 consecutive trading days ending on the trading day immediately prior to the day on which a notice of conversion is delivered. The note matures on December 27, 2016, and bears interest at the highest lawful rate, but not more than 20% per annum. | |
| The Company has determined that the conversion feature embedded in the notes referred to above that contain a potential variable conversion amount which constitutes a derivative which has been bifurcated from the note and recorded as a derivative liability at fair value, with a corresponding discount recorded to the associated debt. The excess of the derivative value over the face amount of the note is recorded immediately to interest expense at inception. The above notes are presented net of a discount of $226,186 at December 31, 2015, on the accompanying balance sheet. The Company used the Black Scholes Merton valuation model to value the conversion features using an expected life of 1 year, average volatility rate of approximately 453% and 396% and a discount rate of 0.35% |
| • | A series of promissory note conversion agreements that the Company entered into during 2014 with ten unaffiliated individuals in the aggregate amount of $224,500. These notes are convertible into shares of the Company’s common stock at a conversion price of $.05 per share. The loans are non-interest bearing and have no stated maturity date. |
| • | A promissory note conversion agreement that the Company entered into with an unaffiliated individual in the amount of $10,000. This note is convertible into shares of the Company’s common stock at a conversion price of $.05 per share. The note bears interest at 15% per annum and matured April 3, 2015. The Company is currently negotiating an extension of the maturity date. |
NOTE 7 – Notes Payable
During 2014, the Company entered into a series of promissory notes with four unaffiliated individuals in the aggregate amount of $457,000. These notes bear interest at rates ranging from 10% to 15% (with a weighted-average rate of 11.7%) and matured as follows:
| April 10, 2015 | $ | 300,000 | ||||
| May 19, 2015 | 150,000 | |||||
| September 30, 2015 | 7,000 |
These notes are currently past due and the Company is negotiating an extension of their respective maturity dates.
On August 15, 2015 the Company issued a promissory note in the amount of $150,000 to an unrelated third party. The note bears interest at .48% per annum provided that the note is paid on or before maturity date, or 2 percentage points over the wall street journal Prime rate, if not repaid on or before the maturity date. This note matures on August 11, 2016. Upon an event of default, as defined in the note, interest shall be compounded daily.
NOTE 8 – Note Payable – Related Party
In connection with the merger referred to in Note 1, the Company made a promissory note in the principal amount of $400,000 in favor of its former president and sole director. For a description of the provisions of the note, see Note 6. On August 20, 2015, the holder of the note assigned it to an unrelated third party. See note 6.
NOTE 9 – Loan Payable - Shareholder
During the year ended December 31, 2015, and 2014, the Company received advances of $25,147 and $68,347, respectively, from one of its stockholders who is a related party to help finance its operations. These advances are non-interest bearing and have no set maturity date. The balance at December 15, 2015, and 2014, aggregated $93,494 and $68,347, respectively. The Company expects to repay these loans when cash flows become available.
NOTE 10 – Stockholders’ Deficiency
On January 9, 2014, the Company amended its articles of incorporation to raise its authorized common stock to 6 billion shares, par value $0.00001 per share.
In connection with the merger referred to in Note 1, the holders of membership units in D&C received 3,846,000,000 shares of the Company in exchange for their membership units.
In connection with the merger, the former president and sole director of the Company exchanged 35,000,000 shares of common stock of the Company owned by him and indebtedness owed to him for a convertible promissory note in the amount of $400,000. Also in connection with the merger, the Company completed a private placement in which 700,000,000 shares of common stock were issued for proceeds of $40,000.
On August 28, 2015, the Company issued 428,571,429 shares of common stock in connection with the conversion of $50,000 of the principal amount of the $400,000 Convertible Promissory Note described in Note 7.
NOTE 11 – Concentrations
For the year ended December 31, 2015, none of our customers accounted for more than 10% of sales. For the year ended December 31, 2014, two customers accounted for 12% and 11% of sales.
For the year ended December 31, 2015 and 2014, the Company purchased approximately 95% of its products from one distributor.
NOTE 12 – Commitments
The Company is committed under an operating lease for its premises. The lease, called for monthly payments of $6,300 plus 55% of operating expenses until May 31, 2015. Effective June 1, 2015, the lease was amended to provide for monthly payments of $7,500 plus 100% of operating expenses thereafter, until the lease expires August 31, 2016.
NOTE 13 – Subsequent Events
Management has evaluated subsequent events through the date which the financial statements were available to be issued. On April 1, 2016 the holder of a convertible note referred to in note 6 converted $60,000 of principal into 189,513,580 shares of common stock.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act as of December 31, 2014. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were not effective as of such date, at a reasonable level of assurance, in ensuring that the information required to be disclosed by our company in the reports we file or submit under the Exchange Act is: (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, management has concluded that our internal control over financial reporting was not effective as of December 31, 2014. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. This report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting pursuant to temporary rules of the Commission.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In connection with our assessment of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002, we identified the following material weaknesses in our internal control over financial reporting as of December 31, 2014:
| • | We have difficulty in accounting for complex accounting transactions particularly in relation to complex equity transactions. |
| • | Documented processes do not exist for several key processes. |
Lake of segregation of duties
Because of the material weaknesses noted above, we have concluded that we did not maintain effective internal control over financial reporting as of December 31, 2015, based on Internal Control over Financial Reporting – Guidance for Smaller Public Companies issued by COSO .
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following individuals were serving as executive officers and directors in the following positions on December 31, 2015:
| Name | Age | Position | ||||
| Curtis Fairbrother | 54 | Chairman of the Board; CEO; Director | ||||
| Douglas Heldoorn | 47 | President; COO; Director | ||||
Curtis Fairbrother, age 54, is the Co-Founder of Distributors together with Douglas Heldoorn. Mr. Fairbrother has served since March 4, 2014, as Chairman of the Board and Chief Executive Officer of Acology. From January 2013 to March 2014, he served as a manager of Distributors. From October 2011 until December 2012, he conducted preparatory work for the establishment of Distributors and its business together with Mr. Heldoorn. From September 2005 to September 2011, he was with New Century Automotive Group acting as Service and Parts Director for BMW and Mini Cooper Dealerships. Mr. Fairbrother has over 20 years’ experience in business start-ups and consolidation. He has managed multi-million dollar budgets in connection with the distribution and sales of in the automotive retail and wholesale parts industry and in that industry, he has overseen national parts distribution and management, research and development, brand recognition and new product development. Mr. Fairbrother graduated from La Mirada High School in La Mirada, California, in 1980.
Douglas Heldoorn, age 47, has over 20 years of management and executive experience. He has served since March 2014, as President and Chief Operating Officer of Acology. From January 2013 to March 4, 2014, he served as a manager of Distributors. From October 2011 until December 2012, he conducted preparatory work for the establishment of Distributors and its business together with Mr. Fairbrother. Prior thereto, from November 2006 to September 2011, he was employed by Caliber Promotions, a used car sales organization, as a motivational speaker. Mr. Heldoorn graduated from Perris High School in Perris, California, in 1986.
Messrs. Fairbrother and Heldoorn will serve as directors until the next annual meeting of Acology’s shareholders or until their respective successors have been elected and duly qualified. Thereafter, directors will be elected for one-year terms at the annual shareholders’ meeting. Officers hold their positions at the pleasure of the board of directors, absent any employment agreement. There was and is no arrangement or understanding between any director or officer of Acology and any other person pursuant to which any director or officer was or is to be selected as a director or officer, and, to our knowledge, there is no arrangement, agreement, plan or understanding (a) as to whether non-management shareholders will exercise their voting rights to continue to elect the current directors to Acology’s board and or (b) between non-management shareholders and management under which non-management shareholders may directly or indirectly participate in or influence the management of our affairs.
The prior experience of Mr. Fairbrother in management, together with his willingness to spend substantially all of his time as an officer of Acology and his willingness to provide capital to us, led to the conclusion that he was a desirable person to serve as a director. The prior experience of Mr. Heldoorn in sales and management, together with his willingness to spend substantially all of his time as an officer of Acology and his willingness to provide capital to us, led to the conclusion that he was a desirable person to serve as a director.
All executive officers are elected by the Board and hold office until the next Annual Meeting of stockholders and until their successors are elected and qualify.
Family Relationships
None.
Related Party Transactions – TSD
Mr. Fairbrother, his son and Mr. Heldoorn served on the board of directors of TSD as three of six directors. They received no compensation for these services and neither they nor we had any financial interest in TSD. For the year ended December 31, 2014, we were owed $15,002 for products that we sold to TSD, which has been written off as bad debt. We believe that the prices at which we sold these products to TSD were those that at which we could have sold them to other distributors. As indicated above, we have terminated our contract with TSD and Mr. Fairbrother, his son and Mr. Heldoorn have resigned from TSD’s board of directors.
Capital Contributions and Loans
Messrs. Fairbrother and Heldoorn, our two officers and directors, made capital contributions to Distributors on several occasions during 2013, totaling $141,896. Of this amount, $19,825 was paid directly to Distributors and the remainder was paid by them to third parties for inventory and general and administrative expenses. As an incident of these contributions, each of them acquired his membership units in Distributors, for which he received shares of Common Stock as merger consideration in the Merger. See “The Merger.”
During 2015 and 2014, respectively Mr. Heldoorn loaned $25,147 and $68,347 to the Company, repayable on demand, without interest. These loans are undocumented.
Employment Arrangements
There are no employment agreements between us and our officers and directors. During the year ended December 31, 2014, we paid Mr. Fairbrother $110,450 and Mr. Heldoorn $118,200, respectively, and in the year ended December 31, 2015, we paid Mr. Fairbrother $111,534 and Mr. Heldoorn $107,500, respectively.
Merger
In connection with the Merger, each of Messrs. Fairbrother and Heldoorn received 1,923,000,000 shares of Common Stock as merger consideration for his 100,000 membership units in Distributors. This merger consideration was fixed in negotiations at arms’ length between Acology and Distributors prior to the time that either of them was an officer or director of Acology.
Exchange Transaction
Prior to the Merger, the Former Affiliate beneficially owned 35,000,000 shares of pre-reverse-split common stock and was owed $151,269 for advances that he had made to the Acology, which indebtedness was carried as related party debt on the books of Acology. In satisfaction of a condition precedent to the Merger, the Company and he entered into an Exchange Agreement, dated as of March 4, 2014, pursuant to which (i) these 35,000,000 shares were surrendered, (ii) such indebtedness was extinguished, (iii) Acology made a convertible promissory note, dated March 4, 2014, in his favor and (iv) Acology entered into a pledge agreement, dated March 4, 2014, securing the indebtedness of the Company to him under the convertible promissory note. The Former Affiliate represented and warranted to Acology that (i) the indebtedness of $151,269 was the only indebtedness of Acology owed to him, all other indebtedness of the Acology owing to any other person or entity had been discharged and (iii) no shares of any class or series of the capital stock of Acology, other than its common stock, had been issued. Also on March 4, 2014, Acology prepaid $40,000 of the principal amount of the convertible promissory note. The principal terms of the convertible promissory note and the pledge agreement are as follows:
| · | The Convertible Promissory Note. The convertible promissory note was due March 4, 2015, is subject to acceleration in the event of certain events of default, contains certain restrictive covenants and is secured by a pledge of all of the membership units in Distributors. The note original provided that, if it were not paid at maturity, the unpaid principal amount of the convertible promissory note and the interest accrued thereon would be convertible as a whole or in part from time to time into an indeterminate number of shares of Common Stock at a conversion price per share equal to 50% of the average of the daily closing prices for a share of Common Stock for the three (3) consecutive trading days ending on the trading day immediately prior to the day on which the convertible promissory note is delivered for conversion. The note was in default when it was not paid on its maturity date of March 4, 2015, On August 20, 2015, the Former Affiliate assigned this note to an unrelated third party, and on September 14, 2015, the maturity of the note was extended to September 14, 2016, all events of default were waived, the holder waived any right to received interest at the default rate and it was agreed that the holder could immediately convert the principal and interest of the note into common stock, notwithstanding the extension of the maturity date and the cure of defaults. The convertible promissory note also contains certain restrictive covenants under which Acology may not consummate a merger, consolidation, business combination, tender offer, exchange of shares, recapitalization, reorganization, redemption or other similar event or to transfer any of its property or assets outside the ordinary course of business without the consent of its holder; may conduct business only through wholly owned subsidiaries; may not sell, transfer, mortgage, pledge or otherwise dispose of any shares or interests in any of its subsidiaries or permit any of them to transfer, mortgage, pledge or otherwise dispose of any shares or interests in a subsidiary held by it; is required to file reports timely under and remain subject to the reporting requirements of the Securities Exchange Act of 1934; and may not file a registration statement under the Securities Act until one year after the date on which the holder shall first have converted any portion of the convertible promissory note into shares of Common Stock.As the result of conversions, the outstanding principal amount of the convertible promissory note was $310,000 at December 31, 2015, and is $250,000 as of the date of this report. | |
| The convertible promissory note constitutes a material risk to our business because: |
| 1. | If it is not paid when due, the holder may foreclose on the membership units of Distributors, through which we conduct the predominant portion of our operations, in order to satisfy, as a whole or in part, the indebtedness outstanding under the convertible promissory note, with the result that Acology would be left with only with the operations conducted by Printing. (See “Pledge Agreement,” immediately below.) |
| 2. | We may not engage in transactions under which we could acquire or combine with other businesses or reorganize without the holder’s consent, which he may withhold in his discretion. If the holder did not consent to a proposed acquisition, we could lose a desirable business opportunity. |
| 3. | Our inability to file a registration statement restricts our ability to obtain financing in the public markets. As a result, until the convertible promissory note is paid, we may not be able to raise some or all of the funding required to execute our business plan, expand our business or take advantage of other opportunities. While the holder could waive this restriction, he is not obligated to do so. |
| • | The Pledge Agreement. The pledge agreement provides, among other things, that all of the membership units in Distributors are pledged to the holder of the convertible promissory note to secure the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the obligations of Acology under the convertible promissory note. In the event that Acology were to default under the convertible promissory note, the holder would be entitled to foreclose on and sell the shares of Distributors at a public or private sale and apply the proceeds of such sale to satisfy the convertible promissory note. Inasmuch as all of our operations are conducted through Distributors, the result of such sale would be that Acology would have no operations and the holders of Common Stock would lose all or substantially all of their investment. |
Private Placement
On March 4, 2014, pursuant to a Stock Purchase Agreement, dated January 29, 2014, between Acology and Carrizo LLC, a limited liability company controlled by the Former Affiliate LLC purchased 200,000,000 shares of Common Stock, which were registered under the Securities Act of 1933 for public offering and sale, for the purchase price of $11,428.57. On March 24, 2014, Acology and Carrizo LLC also entered into a Registration Rights Agreement, dated that date, pursuant to which Acology filed the registration statement so registering these shares.
Board Ratification
On March 4, 2014, following the appointment of Messrs. Fairbrother and Heldoorn directors and the resignation of Richard Astrom as a director, the new board ratified, confirmed, adopted and approved all resolutions adopted by Mr. Astrom, as sole director of Acology, in connection with the adoption, approval and consummation of the Merger Agreement and all instruments executed and delivered and actions taken by him, as President of Acology or otherwise, pursuant to said resolutions, including his execution and delivery of the above mentioned exchange agreement, convertible promissory note and pledge agreement in the name and on behalf of Acology.
Involvement in Certain Legal Proceedings
None of Acology’s directors or executive officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree, or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters, if any, that were dismissed without sanction or settlement.
Director Compensation
Currently, Acology is not paying its directors any cash or other compensation. In the future, Acology may consider appropriate forms of compensation, including cash compensation and the issuance of Common Stock and stock options.
Director Independence
Currently, Acology does not have any directors who are independent. We have used the definition of “independent director” set forth in NASDAQ Stock Market Listing Rule 5605(a)(2) to make this determination. This rule provides that an “independent director” is a person other than an officer or employee of Acology or any other individual having a relationship which, in the opinion of the company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. This rule further provides that a director cannot be considered independent if:
| • | he is, or at any time during the past three years was, an employee of the company; |
| • | he or his family member accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions); |
| • | his family member is, or at any time during the past three years was, an executive officer of the company; |
| • | he or his family member is a partner in, controlling shareholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions); |
| • | he or his family member is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the Company served on the compensation committee of such other entity; or |
| • | he or his family member is a current partner of the company’s outside auditor, or at any time during the past three years was a partner or employee of the company’s outside auditor, and who worked on the company’s audit. |
Committees
Acology has not established any committees of its Board of Directors, including a compensation committee, nominating committee or an audit committee, although it is permitted to do so under the Florida Business Corporation Act (the “FBCA”) and its by-laws. Acology believes that, until it begins to develop a compensation plan for its officers and directors, a compensation committee is not necessary.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the officers and directors, and persons who own more than 10% of a registered class of equity securities registered under section 12 of the Exchange Act, to file reports of ownership and changes in ownership of equity securities of Acology with the SEC. Officers, directors and greater-than-10% shareholders are required by SEC regulations to furnish the corporations which they serve or in which they hold equity securities with copies of all forms that they file pursuant to Section 16(a). Since no class of Acology’s equity securities is registered under Section 12, none of these persons is required to comply with Section 12 with respect to Acology.
Code of Ethics
We have a Code of Business Ethics that applies to all employees, including our Chief Executive Officer and senior financial officers. These standards are designed to deter wrongdoing and to promote the highest ethical, moral and legal conduct of all employees. Our Code of Business Ethics may be found on our website, www.acologyinc.com .
ITEM 11. EXECUTIVE COMPENSATION
(a) Compensation
The following table sets forth compensation awarded to, earned by or paid to our Chief Executive Officer and the four other most highly compensated executive officers with compensation in excess of $100,000 for the years ended December 31, 2015, 2014 and 2013 (collectively, the “Named Executive Officers”).
| SUMMARY COMPENSATION TABLE | ||||||||||||||||||||||||||||||||||||||
| Nonqualified | ||||||||||||||||||||||||||||||||||||||
| Non-Equity | Deferred | |||||||||||||||||||||||||||||||||||||
| Stock | Option | Incentive Plan | Compensation | All Other | ||||||||||||||||||||||||||||||||||
| Name | Year | Salary | Bonus | Awards | Awards | Compensation | Earnings | Compensation | Total | |||||||||||||||||||||||||||||
| Curtis | 2015 | 111,534 | 0 | 0 | 0 | 0 | 0 | 0 | $ | 111,534 | ||||||||||||||||||||||||||||
| Fairbrother, | 2014 | $ | 110,450 | 0 | 0 | 0 | 0 | 0 | 0 | $ | 110,450 | |||||||||||||||||||||||||||
| CEO 1 | 2013 | $ | 78,3570 | 0 | 0 | 0 | 0 | 0 | 0 | $ | 78,3570 | |||||||||||||||||||||||||||
| Douglas | 2015 | $ | 107,500 | 0 | 0 | 0 | 0 | 0 | $ | 107,500 | ||||||||||||||||||||||||||||
| Heldoorn, | 2014 | $ | 118,200 | 0 | 0 | 0 | 0 | 0 | 0 | $ | 118,200 | |||||||||||||||||||||||||||
| COO 1 | 2013 | $ | 58,8000 | 0 | 0 | 0 | 0 | 0 | 0 | 58,8000 | ||||||||||||||||||||||||||||
| 1 | Held office since March 4, 2014. |
| 2 | Held office until March 4, 2014. |
Employment Contracts
We do not have an employment contract with any executive officer. We have made no long term compensation payouts.
Equity Awards, Grant Based Awards, Stock Options, Pension Benefits and Deferred Compensation
Acology has never granted equity or grant based awards, stock options or pension benefits and has not entered into any deferred compensation plan or arrangement.
Compensation Analysis
Acology is presently paying compensation to its officers on an irregular and inadequate basis. We believe that regular and adequate compensation will eventually be required to retain their services. In particular, we believe that adequate compensation for persons with Messrs. Fairbrother’s and Heldoorn’s credentials and experience at a like stage of its development would involve a salary of approximately $120,000 per year, a cash bonus and non-cash incentive compensation based on performance, and stock options. We recognize that we needs to develop compensation programs that will provide adequate cash and short- and long-term incentive compensation in order to attract and retain qualified officers and key employees, but we has not yet determined what the compensation program is designed to reward; the various elements of compensation; the bases for selecting each element; how we will determine the amount to be paid for each element (or the formula for such payment); and how our decisions regarding that element fit into our overall compensation objectives and affect decisions regarding other elements.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Persons Other than Management
Acology knows of no person, other than its directors and executive officers, who owns beneficially five percent (5%) or more of its outstanding Common Stock.
Security Ownership of Management
The following table sets forth certain information regarding the beneficial ownership of Common Stock as of December 31, 2015, for the following: (1) each of our directors and executive officers and (1) our directors and executive officers as a group.
| Name and Amount of Beneficial Ownership of | ||||||||
| Name and Address of Beneficial Owner1 | Common Stock | Percent of Class | ||||||
| Curtis Fairbrother | 1,879,000,000 | 37.8 | % | |||||
| Douglas Heldoorn | 1,923,000,000 | 38.6 | % | |||||
| All directors and executive officers as a group (2 persons) | 3,846,000,000 | 76.4 | % | |||||
| 1 | The address for each beneficial owner is in care of Acology at 1620 Commerce St., Corona, CA 92880. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
None of our directors or executive officers or their respective immediate family members or affiliates is indebted to us. As of the date of this report, there is no material proceeding to which any of our directors, executive officers or affiliates is a party or has a material interest adverse to us.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
We were billed $25,000 for 2015 and 19,500 for 2014 for professional services rendered by the principal accountant for the audit of our annual financial statements, the review of our quarterly financial statements, and other services performed in connection with our statutory and regulatory filings.
Audit Related Fees
There were $0 in audit related fees for 2015 and $0 in audit related fees for 2014. Audit related fees include fees for assurance and related services rendered by the principal accountant related to the audit or review of our financial statements, not included in the foregoing paragraph.
Tax Fees
Tax fees were $0 for 2014, and $0 for 2013.
All Other Fees
There were no other professional services rendered by our principal accountant during the last two fiscal years that were not included in the above paragraphs.
Preapproval Policy
Our Board of Directors reviews and approves audit and permissible non-audit services performed by its independent accountants, as well as the fees charged for such services. In its review of non-audit service fees and its appointment of Paritz & Company, P.A. as the Company’s independent accountants, the Board of Directors considered whether the provision of such services is compatible with maintaining independence.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| (a) | Financial Statements and Schedules. The following financial statements and schedules for the Company as of December 31, 2013 are filed as part of this report. |
| (1) | Consolidated Financial Statements of the Company. |
| (2) | Financial Statement Schedules: |
All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(A) EXHIBITS.
The following Exhibits are incorporated herein by reference or are filed with this report as indicated below.
| Exhibit | Description | |||
| 2.1 | Agreement and Plan of Merger, dated as of December 24, 2013, by and among the Registrant, PNCR, Acquisition, LLC and D&C Distributors, LLC. Filed Exhibit 2.1 to Registration Statement on Form S-1 (File No 333-195866) and incorporated herein by reference. | |||
| 2.2 | Amendment of Agreement and Plan of Merger, dated as of March 4, 2014, by and among the Registrant, PNCR, Acquisition, LLC and D&C Distributors, LLC. Filed as Exhibit 2.2 to Registration Statement on Form S-1 (File No 333-195866) and incorporated herein by reference. | |||
| 3.1 | Articles of incorporation of the Registrant, filed September 5, 1997. Filed as Exhibit 3.1 to Registration Statement on Form S-1 (File No 333-195866) and incorporated herein by reference | |||
| 3.2 | Amendment to Articles of Incorporation of the Registrant, filed February 15, 1999. Filed as Exhibit 3.2 to Registration Statement on Form S-1 (File No 333-195866) and incorporated herein by reference. | |||
| 3.3 | Amendment to Articles of Incorporation of the Registrant, filed January 26, 2000. Filed as Exhibit 3.3 to Registration Statement on Form S-1 (File No 333-195866) and incorporated herein by reference. | |||
| 3.4 | Amendment to Articles of Incorporation of the Registrant, filed July 5, 2012. Filed as Exhibit 3.4 to Registration Statement on Form S-1 (File No 333-195866) and incorporated herein by reference. | |||
| 3.5 | Amendment to Articles of Incorporation of the Registrant, filed January 9, 2014. Filed as Exhibit 3.5 to Registration Statement on Form S-1 (File No 333-195866) and incorporated herein by reference. | |||
| 3.6 | By-laws of the Registrant. Filed as Exhibit 3.6 to Registration Statement on Form S-1 (File No 333-195866) and incorporated herein by reference. | |||
| 10.1 | Form of Stock Purchase Agreement. Filed as Exhibit 10.1 to Registration Statement on Form S-1 (File No 333- 195866) and incorporated herein by reference. | |||
| 10.2 | Form of Registration Rights Agreement. Filed as Exhibit 10.2 to Registration Statement on Form S-1 (File No 333- 195866) and incorporated herein by reference. | |||
| 10.3 | Exchange Agreement, dated as of March 4, 2013, by and between Registrant and Richard S. Astrom. Filed as Exhibit 10.3 to Registration Statement on Form S-1 (File No 333-195866) and incorporated herein by reference. | |||
| 10.4 | Convertible Promissory Note, dated March 4, 2014, made by the Registrant in favor of Richard S. Astrom. Filed as Exhibit 10.4 to Registration Statement on Form S-1 (File No 333-195866) and incorporated herein by reference. | |||
| 10.5 | Pledge Agreement, dated March 4, 2014, by and between the Registrant and Richard S. Astrom. Filed as Exhibit to Registration Statement on Form S-1 (File No 333-195866) and incorporated herein by reference. | |||
| 10.6 | Distributorship Agreement, dated August 11, 2013, by and between Polymation LLC and D&C Distributors, LLC. Filed as Exhibit 10.6 to Registration Statement on Form S-1 (File No 333-195866) and incorporated herein by reference. | |||
| 10.7 | Summary of Oral Product License and Distribution Agreement by and between D&C Distributors, LLC and TSD Worldwide, Inc. Filed as Exhibit 10.7 to Amendment No. 2 to Registration Statement on Form S-1 (File No. 333- 195866) and incorporated herein by reference. | |||
| 10.8 | Product License and Distribution Agreement, dated April 28, 2014, by and between D&C Distributors, LLC and IGreen Planet Store Ltd. Filed as Exhibit 10.8 to Registration Statement on Form S-1 (File No 333-195866) and incorporated herein by reference. | |||
| 10.9 | Addendum, dated November 18, 2013 to Oral Agreement between D&C Distributors, LLC and TSD Worldwide, Inc. (summarized in Exhibit 10.7). Filed as Exhibit 10.9 to Amendment No. 2 to Registration Statement on Form S- 1 (File No. 333-195866) and incorporated herein by reference. | |||
| 10.10 | Lease, dated July 29, 2014, by and between Arthur E. Gordon and Doug Heldoorn, an individual DBA D&C Distributors. Filed as Exhibit 10.10 to the Annual Report of Registrant on Form 10-K and incorporated herein by reference. | |||
| 10.11 | Lease Amendment, dated June 12, 2015, by and between Frontrunner Communications/Arthur Gordon and Acology, Inc./D&C Distributors LLC. Filed herewith. | |||
| 10.12 | Convertible Note Modification Agreement, dated as of September 14, 2015, by and between Registrant and Toby Smith. Filed as Exhibit 10.1 to the Quarterly Report of Registrant on Form 10-Q for the quarter ended September 30, 2015, and incorporated herein by reference. | |||
| 21.1 | Subsidiaries of the Registrant. Filed herewith. | |||
| 31.1 | Certification of the Chief Executive Officer of Acology, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |||
| 32.1 | Certification of the Principal Financial and Accounting Officer of Acology, Inc. pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By:
/s/ Curtis Fairbrother
Name: Curtis Fairbrother
Title: Chief Executive Officer
Date: April 14, 2016
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| Name | Title | Date | ||||
| /s/ Curtis Fairbrother | Chairman of the Board; CEO; principal executive | April 14, 2016 | ||||
| Curtis Fairbrother |
officer; principal accounting officer; director
|
|||||
| /s/ Douglas Heldoorn | President; COO; Director | April 14, 2016 | ||||
| Douglas Heldoorn |